Do you spend dividends in taxable accounts or reinvest

[Quantum Sufficit]

Hi,

We retired in march of this year. Our luck would have the market falter but fortunately, despite building a new house and outfitting it, I was able to live on only a 9k draw from short term bonds because of other income. I would think it advantageous to reinvest dividends in a taxable acct as they are qualified dividends (vanguard total stock) and should incur a 0% tax rate. I would gladly take them as cash and spend if the market was up from our cost basis but alas, it is not. Therefore, why not reinvest the dividends and draw down more from short term bonds? (ie, spend from what has done the best this year?)

Thanks.

[Souschef]

IMO, reinvesting dividends is a good idea. I have been doing all my investing life. The power of compounding is awesome

[LOL!]

Vanguard Total Stock this year is only 95% qualified dividends. Large-cap index is 100% qualified dividends.

But why have any bonds in a taxable accounts? That's generally not tax-efficient. So look at the big overall pictures. If your bonds were in tax-advantaged accounts, you could spend the stock dividends and even sell stock held long-term to get the 0% LTCG tax rate. If your asset allocation was messed up by selling too much stock, then exchange from bonds to stocks in your tax-advantaged account.

So tax-efficient equities in a taxable account can be tax-free. It is like having more money in your Roth IRA when it is done right.

[Car-Guy]

Burns a hold in my pocket. Dividends are deposited into my checking account and just "go" for "whatever". Just another source of cash flow. I only know how much my dividends add up to when I do my taxes the following year.

[KB]

I take all my dividends. Between those, SS and pensions, I have enough to leave my investments alone. However at some point I may start taking up to 4% each year, though right now I don't know what I would spend the money one yet.

[gcgang]

Quote:

Originally Posted by Souschef IMO, reinvesting dividends is a good idea. I have been doing all my investing life. The power of compounding is awesome

I reinvested dividends all my (accumulation) investing life, also. Now, in the decumulation(?) phase, I take the cash.

[RunningBum]

Reinvesting dividends is no different than taking the cash and immediately rebuying, only it is done a day or two more quickly if you do it automatically. There is no tax advantage to reinvesting. You report the dividend income no matter what, at 0% or 15% depending on your bracket. Whether you reinvest has no bearing on the taxes.

If you want to rebuy what you're getting dividends on, reinvesting is fine. If you want the flexibility to invest in whatever you want, or spend that cash and hold other investments, don't reinvest. I like the flexibility. If I really want more of the fund that gave dividends, I can rebalance.

It really doesn't matter that much. If you reinvest but decide that's not what you really wanted to do, you can quickly sell (with SpecID basis) and probably have very little short term gain or less.

I just prefer to keep it simple. I need a certain amount of cash throughout the year. I can get much of it with the dividends. Then I look at how I want my investments to be, and rebalance if needed.

I don't quite get the last sentence in the OP's post. Were short term bonds actually the best investment this year?

[bingybear]

I don't auto reinvest any distribution in taxable accounts, but do in most cases in tax free or deferred accounts. That doesn't mean I spend the distributions. Most are reinvested as part of re-balancing or in new investments.
In retirement you do have to get your spending cash from somewhere. If you have a pension or are taking SS...that might do it. For people like me (too young for SS and no pension), we take it from cash or distributions.
But in retirement some of the rules may change for some. Assume you have no income source, so you take from cash, distributions or selling assets. Assuming taxes being filed MFJ with $2MM distributing 2% would give us $40k. With MFJ there is about $20k between the standard deduction and exemptions. What this means is that you can handle some bond or non-qualified distributions as you can offset at least $20k.

I would suggest validating the standard rules based on your own situation as to where different assets belong.
To auto reinvest or to just invest distributions based on other factors (like re-balancing) is a matter of choice.

[big-papa]

I reinvest - automatically.


Sent from my iPad using Early Retirement Forum

[W2R]

In my taxable accounts, I take dividends in cash. I use them for rebalancing and living expenses.

[audreyh1]

Quote:

Originally Posted by W2R In my taxable accounts, I take dividends in cash. I use them for rebalancing and living expenses.

Same here.

[RockyMtn]

Quote:

Originally Posted by gcgang I reinvested dividends all my (accumulation) investing life, also. Now, in the decumulation(?) phase, I take the cash.

+1. Those dividends are my paycheck!

[Fedup]

Reinvest. I'm in a process of shifting some funds in taxable account that pay high dividend to Roth IRA.


Sent from my iPad using Early Retirement Forum

[Mulligan]

I let it build up in my money market and then I find something else to buy.


Sent from my iPad using Tapatalk

[scrabbler1]

I take dividends as cash if they are going to be used to pay my expenses. Otherwise I reinvest them. Pretty simple.

[karen1972]

I've been re-investing for the last decade, but thinking this year I may switch a few to cash to help pay the tax bill. Seems easier than worrying about what to sell.

[sheehs1]

I don't reinvest either and allow the dividends to go to the cash account. I use it to buy other positions or more of the same if I chose to do so. I have not started taking them as cash to bolster my living expenses….yet.

[Alan]

Now that we are in draw-down I use the dividends in the taxable accounts for expenses.

[pb4uski]

When I was working I reinvested. Once I retired I take them in cash.. in effect the reduce my withdrawals since what we need exceeds our dividends.

[ejman]

Quote:

Originally Posted by pb4uski When I was working I reinvested. Once I retired I take them in cash.. in effect the reduce my withdrawals since what we need exceeds our dividends.

+ 1 Same here